Indonesia economy analysis - Free Essay Example

INDONESIA ECONOMY ANALYSIS Indonesia is the fifth biggest country in the Asia and 19th in the world based on GDP growth1.It is rich in natural resources (minerals and fuel) and it owns a beautiful landscape to support its tourism. The weakness is in the Human Resources management and it resulted to low distribution of income. One of the alarms of Indonesia economy is in the year 2005. In 2005, world oil price became high and this made the burden on governments subsidy increased. This condition forced government to increase domestic oil price by 143 %. GDP as of the end of the year still grew impressively, but inflation and foreign exchange rate suffered the most. Inflation run 17.11 % and Rupiah depreciated toward most of strong currencies. Bank Indonesia raised the interest rate to 12.75 % to restrain the inflation and do an intervention to stabilize Rupiah. Indonesia GDP is expanding year after year. It shows the upward trend which means that the growth of economy is well-developed. In the year 2008, Indonesia has met their expectation for the growth to 6.3%. It is accelerated by the rising price and demand for the nations coal, palm oil and rubber pushed exports to a record (Unditu, A. Ghosh, A., 2008). Increasing in the net exports will raise the GDP growth. It is reported that Indonesia has reached an unprecedented $12.9 billion or 16.1% exports in June 2008 as rising shipments to India and China (www.bloomberg.com). It is expected that Indonesias economy will grow around 5.5% year on year in the first quarter, helped by increasing consumer spending and lower inflation. Finance Minister of Indonesia, Sri Mulyani Indrawati is very optimistic about the future economy in Indonesia. She said that Indonesia can still maintain a quite healthy growth for this year. (Indrawati, S.M., 2009) She plans to spend more than 72 trillion rupiah on infrastructure to boost growth and create jobs. Indonesias economic growth will be forecasted to 5% for 2009, down from 6.3% in 2008. Morgan Stanley, Financial services firms, predicted that Indonesias economic growth may reach 7% by 2011. It is signaling the biggest economy in Southeast Asia. Stable political conditions despite the 2009 president elections and strong domestic demand despite the global economic downturn will help to push the economy towards its potential 6 to 7 percent growth from 2011 onwards (www.aseanaffairs.com). Therefore, Indonesia should use the momentum to gain a positive growth to attract investor to enter their market. Inflation in Indonesia is mostly influenced by foodstuff, housing construction, and prepared food. These three components are the biggest contribution (around 69% of the total CPI) in counting the inflation rate . In 2003, Indonesia ever experience deflation from 7.17% till 5.16%. This is because of the descent of price from those three components. But that condition hasnt taken forlong time, because it started to increase in 2004. The government has increased the interest rate till record as the highest interest rate in that year. Inflation continued and increased in 2005 due to the higher price of fuel oil. It is estimated that inflation in Indonesia will go up continuously due to the high price of food and petroleum price. By the year 2008, the inflation rates reached to 11.06%. It happened due to the global financial crisis. When inflation got high, the currency of rupiah became higher to other currencies. Every import products looks very expensive, because the price is increasing. Central bank governor Miranda Goeltom said on Sunday that Indonesias 2009 year-end inflation is likely to hit the lower end of the central banks forecast of 5-7 percent or around 6.2% due to anticipated ample food supply and lower oil price. Bank of Indonesia decided to decrease interest rate in the early of year 2002 in order to increase inflation. Therefore, it could relieved the expenditure of Indonesias budget because most of the obligation interest rate related to Bank of Indonesia interest rate. The increased in year 2005 was caused by a significant increased of inflation rate which was due to the hike of fuel price. The interest rate in year 2006 was declined because a slow pace of inflation,exchange rate of IDR was strenghthened, and Indonesia has a better position in term of loan. Interest rate was planned to be 7.5% for the next three months because Indonesia need more investment in order to keep their growth on 6%. Hence, hopefully Indonesia still has a better chance to create field work and reduce the percentage of poverty. Therefore, it can give a balance on the macroeconomic side. In the year 2007, BI has cut the interest rate to 8% due to the anticipation of increasing in inflation rate and economy in the near future. This decision is convinced to give a stimulus and keep the momentum of the development in Indonesia economic growth. It also concerned to the higher oil price at that time. The movement of interest rates slope is usually triggered by the movement of inflation rate. In the year 2008, the inflation rate increased to 11.06% so BI increased their rate again to 9.25%. (www.bi.go.id) BI has decided to cut the interest rate to 6.75 on June 2009 (Look at figure 5.3). This decision is concerned with the global financial crisis that happens till now. They did cut to facilitate of giving credit easily to stabilize the macro in order to keep on controlling well. In 2005, when inflation run high and oil price increased, the burden of oil subsidies gave its impact on Rupiah, and it was depreciated against US Dollar. Bank Indonesia took an action to do intervention in order to repress the volatility of Rupiah and it could regain to around 9,000 Rupiah per US Dollar. Since subprime mortgage happened in 2006, Indonesia foreign exchange rate showed a tendency to depreciate against US Dollar. But as of march 2008, Rupiah is strengthening to 9,200 because high oil and gold price made the value of US Dollar depreciated. However, this appreciation of Rupiah is not considerable because until April 2008, value of Rupiah remains stagnant toward US Dollar while in fact, US Dollar has already depreciated significantly against other currencies. But at the end of December, it was a turning point for USA. They got recession due to the credit crisis and collapse of the oil and commodity prices. The currency of US dollar suddenly appreciates around 13% compare to the year 2007. It is expected to depreciate again as long as the Indonesia can run the economy well and keep on stabilizing their economy condition. Euro is significantly strengthening against rupiah in 2005 because of high burden on government that resulted from high oil price. On August 6 bank indonesia cut its benchmark interest rate to bolster Rupiah and it is shown in 2006 where Rupiah gradually became stronger. Now, each Euro is traded more than 16,000 rupiah. Since the case of subprime mortgage happened, Euro is the currency that appreciated most against the US Dollar. With the condition that Indonesia is stagnant toward US Dollar, it will be likely for Rupiah to decrease against Euro in the future. Euro will grew 17.18% against rupiah for 2008, but it will decline 0.33% in 2009 to 16. 85% in 2009. Rupiah experienced the weakest value against Yen in 2005, where it reached 95 rupiah per Japanese Yen. The same reason for the three other currencies occur, that high inflation and large amount of government subsidy give significant impact on the weakening. For most times, Rupiah was traded around 80 Rupiah per Japanese Yen, but since 2007, it showed a tendency to depreciate. In relation to the weakening of US Dollar, Rupiah should not be depreciated against Yen. Eventhough it didnt mean that Rupiah should grew toward it, but in a stable condition and not showing some indication to fall. If we take a look on the above indices, Indonesias performance is good, GDP can still grow in a level of 6%. This implication starts from the same problem arose in 2005, because of high burden in the side of government, consumers confidence fall and currency was depreciated. An outlook stated that Rupiah will depreciate by 17.44% in 2008 but it will be able to gain for the next 3 years by a total of 14.05% . China Yuan is basically having a stable trend against Rupiah, as it moved in the level of 1,000 rupiah per Yuan. In 2005, when Indonesia experienced a high inflation, Rupiah is depreciated to the level of 1,200 but it bounced back to previous value in 2006. Now, in the midst of economy slowdown, Rupiah is gradually depreciated toward Yuan as it worth 1,623 Rupiah per Yuan as of December 31, 2008. Yuan will continue its appreciation against rupiah for the following year as quoted by eurobondonline and for 2009 it will have a gain by 10.74% and another 2.83% for the next 2 years. The growth of China that will be able to recover to its previous level in the future will be the main reason behind its appreciation.